The new governmental changes may affect property developers who rely on payments from leases. Pure Commercial Finance discuss the downfall for developers.
The government released the Housing White Paper on February 7th 2018, which set out its priorities for housing and how they can help increase its supply. This can be done by building homes faster, planning for the right homes in right places, diversifying the market and helping people now. This means big changes for developers who currently rely on payments from leases.
There are over 4 million residential leasehold dwellings in England alone, 1.4 million of which are leasehold houses and these new changes will prevent this number by rapidly growing by stopping the sale of new build leaseholds unless completely necessary.
It should become easier and cheaper for leaseholders to buy-out their freehold and further changes (in England only) will include ground rents on new long leases for houses and flats being set to zero.
The Communities Secretary, Sajid Javid has announced a ban on leaseholds for most new build houses to deliver a fairer and more transparent system for homeowners. Hopefully, this will ‘cut out unfair and abusive practices within the leasehold system’.
Javin has said: "It’s unacceptable for home buyers to be exploited through unnecessary leaseholds, unjustifiable charges and onerous ground rent terms.
It’s clear from the overwhelming response from the public that real action is needed to end these feudal practices. That’s why the measures this government is now putting in place will help create a system that actually works for consumers."
How will the new leasehold changes affect developers?
Tom Lee, Head of Structured Finance at Pure Commercial Finance, had this to say: “Not only will there be less income from annual ground rent fees, but the changes could restrict lending as many lenders will factor in the value of the freehold when calculating the overall GDV of a development site. This allows them to lend more whilst remaining within their LTGDV covenants.
This announcement comes as great news to homeowners, however there are multiple drawbacks for developers.
Previously, builders could also sell the freehold to investors in order to cover the cost of rising building fees and land values, without having to pass the extra costs on to prospective homebuyers. This may no longer be possible.
Overall, these changes could create a two-tier housing market which would make new-build freehold houses more attractive than similar existing leasehold properties.
On recent valuations for development projects, I have noticed that some surveyors are not allowing a value for the freehold. This does have a small impact on value, so the quicker this uncertainty is clarified the better for everyone.”
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